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January 2010 Newsletter

It’s time to discuss market volatility again. If it seems to be back as of late, its because it never actually went away. Since the market bottom in March 2009 through the date of this writing, there have been nine pullbacks ranging from 3-5% or more. The latest pullback stems from a growing list of 12 concerns that include: (1) Uncertainty over Fed Chairman Ben Bernanke’s second term (as of 01-28-10, Bernanke has officially been confirmed for a second term) (2) The prospect of new draconian banking rules and banking taxes (3) The talk of a real estate bubble in China (4) Fears of a continued weak housing environment (5)Political uncertainty in the wake of the Republican’s senate victory in Massachusetts (6) A growing feeling among investors that stocks are overvalued after advancing some 65% (as measured by the S&P 500) off their 2009 low (7) Uncertainty over the financial stability of the nation’s most populous state, California (8) Corporate earnings season (9) The price of the dollar (10) Mortgage rates (11) A continuation of poor access to capital by small businesses (12) Unemployment In fact, things aren’t as bad as they seem. All of the above concerns are part of a healthy market. Hey, we need concerns to prevent euphoria, which is often followed by collapse (i.e. the tech and housing bubbles). Note that in the top 12, I don’t even list war. However, the Afghanistan and Iraq Wars, from an economic standpoint, are part of a stimulus solution to enhance national security while distributing government spending. In fact, all of the aforementioned economic problems are tiny in comparison to the banks’ leveraged derivative trading which caused the greatest decline in housing since the Great Depression. So where do we go from here? Look to earnings. According to Credit Suisse analysts, as of the last week in January, 78% of companies in the S&P 500 which have reported earnings have beat estimates as have 74% of companies in the Russell 1000 (Credit Suisse Quantitative Research, 01/25/10). The earnings summary for the S&P 500 and Russell 1000 are shown in the chart below: Credit Suisse Quantitative Research, January 25, 2010 With the S&P 500 2010 calendar-year earnings per share estimate now at $77.50, a 16x multiple would imply a 1240 year-end value on the S&P 500 while an 18x multiple would imply a 1395 year-end value. So, if the S&P 500 does come through with $77.50 of earnings and 16x multiple, the potential exists for a 12.8% return over the next twelve months, as of this writing. Contact Us to learn more about working with Vaughn Woods Financial Group. Best Regards, Vaughn L. Woods, CFP®, M.B.A. To access our previous newsletters, please visit www.vaughnwoods.com *Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0071 *Fee paid to Goldline Research for administrative costs **Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com *** Credit Suisse Research: Quantitative Research, P. Patel, et al, 01/25/2010 **** Zibel, A. Home sales rose in ’09 as prices plunged 12 pct, Associated Press, 01/25/2010